Eight Takeaways on Mortgages After the Housing Bust

Banks made more mortgages last year than in any year since the housing downturn struck in 2007, buoyed by interest rates that reached their lowest levels on record, according to federal lending data released Wednesday.

The data were collected from 7,400 financial institutions under the Home Mortgage Disclosure Act. Researchers at the Federal Reserve who analyzed the data also published a paper full of noteworthy observations. Here are eight takeaways:

1. Lending is up, but there’s a big asterisk. While the number of mortgage loans made in 2012 increased by 38%, most of that came from refinancing. The number of loans made to people actually buying homes increased by 13% to levels that were still shy of every year between 2000 and 2009. Refinancing got a big boost from low mortgage rates and from retooled federal programs to help borrowers refinance even though they didn’t have any equity in their homes.

2. Borrowers are having trouble making big down payments. Loans made by the two federal agencies with the easiest terms today—the Federal Housing Administration, which requires down payments of just 3.5%, and the Department of Veterans Affairs, which makes loans to veterans and doesn’t require any money down—accounted for almost 45% of owner-occupant home-purchase loans. The share of FHA borrowers with incomes above $100,000 has nearly doubled since 2007, to around 15%, according to the Fed researchers, but the median incomes of FHA borrowers was still 40% lower than incomes of borrowers taking out conventional loans.

3. Large racial and ethnic wealth gaps persist. The number of loans for home purchases by Asian and white borrowers increased by 15%, while lending to African-Americans and Hispanics increased at less than half that rate. Home purchase lending was also weakest in low-income census tracks that have a high share of minority households.

4. The CRA didn’t cause the crisis. In recent years, some critics have argued that the Community Reinvestment Act, a 1977 federal law designed to ensure banks were serving poor neighborhoods, was partly responsible for the mortgage crisis. But the Fed researchers tracked CRA-eligible loans made by banks in 2006—the peak of the housing boom—and found they had below-average delinquency rates. “These findings are inconsistent with the notion that the CRA was a principal driver of the mortgage and financial crisis,” the Fed report concluded.

5. Loan quality is pristine. Average credit scores rose from 701 to 728 for home-purchase loans between 2006 and 2010. Another measure of loan quality, early delinquency rates, have plunged. For conventional home-purchase mortgages made in 2010, just 0.5% of loans had missed two or more payments within their first two years, about 1/20 the rate for loans in 2006.

6. The “qualified mortgage” rule shouldn’t be a major problem. In January, banks could face additional legal liability if they don’t properly ensure borrowers have the ability to repay a loan. The Consumer Financial Protection Bureau issued a “qualified mortgage” standard earlier this year that sets out steps banks can take to prove compliance with the ability-to-pay standard. The “QM” definition says borrowers can’t have total debts that exceed 43% of their monthly income, though the cutoff doesn’t apply to loans which are sold to federally related entities. Around 22% of home-purchase loans in 2010 had debt ratios above 43%, but 70% of those loans were government-backed, meaning they could have still been deemed “qualified mortgages.”

7. Lending is coming back faster for investors. Since 2009, lending to non-owner-occupant buyers “has grown more robustly than owner-occupant lending.” Lending to investors or vacation home buyers rose from 12% of all home-purchase lending in 2010 to 15% of the market in 2011 and 2012.

8. Home-equity lending is way down. During the housing bubble, many homeowners used second mortgages, or “piggyback” loans, to buy their house, eliminating the need for a down payment in some cases. Others used home-equity loans to take cash out of their house to fund renovations or other spending. In 2006, nearly 1.3 million borrowers used a second mortgage to buy a home, this fell to under 42,000 in 2010, and it has stayed near that level in 2011 and 2012. Meanwhile, home-equity loans for home improvement fell to 73,000 loans last year, down from nearly 600,000 in 2006.